This article was updated on June 29, 2018.
In the quest for increased flexibility and cost control, many organizations are choosing to use the contract worker and other outsourced services rather than in-house labor. According to The Wall Street Journal, many large firms outsource between 20 to 50 percent of their total workforce. Even more, industries like oil, gas and pharmaceuticals often employ twice as many contractors as full-time employees.
A Growing Trend
According to a 2016 Deloitte survey, respondents noted that they are increasing outsourcing costs from 14 to 36 percent in functions including IT, legal, tax, HR, finance and procurement. Finance outsourcing was found to be rising most rapidly. Like anything, there are pros and cons of using outsourced labor versus in-house talent, and as outsourcing grows in importance, finance leaders need to develop a strategy that defines when organizations should keep talent in-house and when it should employ temps, contractors or vendors.
Is It a Core Competency?
The first factor to consider is whether a function is a core competency of the business. If it is, the organization should use full-time employees and focus efforts on being the best it can be at that function. As The Wall Street Journal notes, retailer Target understands this. When Mike McNamara become chief information officer of Target, 70 percent of their IT jobs were outsourced. Today 70 percent are full-time employees. The business realized its core competency needed to be in supply chain technology in order to optimize the sourcing, delivery, inventory and sales of products to customers.
Daily Management and High and Low Turnover
A second factor to consider in a strategy for using in-house or outsourced labor is the cost of management. Jobs with high turnover and jobs that require high levels of management oversight should be considered for outsourcing. It's not just a matter of direct labor costs, but a matter of the indirect costs of recruiting, onboarding and ongoing management and training of those employees. These are costs that can add up but aren't directly reflected in labor costs. With such an arrangement, there could be much less to manage internally.
Analyze Trade-Offs of Direct and Indirect Costs
As Deloitte reports, 59 percent of organizations use contract workers as a cost-cutting tool. Even so, it's still not a simple equation. Cost savings in salaries aren't always the benefit — the main benefit can be in the time and resource savings of managing a team.
Therefore, finance leaders need to factor in myriad indirect costs of recruiting and ongoing management. It might even make sense to pay a vendor a higher rate than an organization would pay in compensation of full-time employees if the indirect costs of management are significantly lower.
The Right Strategy
Outsourcing is likely not going anywhere anytime soon. So as you consider building your outsourcing strategy, ask two questions:
1. Is the function core to our business?
2. Do the cost-benefit trade-offs work in our favor?
Answers to these two questions will help ensure the right balance of in-house and outsourced talent.
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